For decades the Federal Reserve, and the Federal Government, hasn't used the correct tool to maintain normal economic activity, and to prevent economic bubbles from forming.
The Great Depression, and the Great Recession were both the result of a financial crisis bought on by the excessive creation of debt (money) in the private sector.
In the last decade, 2000 to 2010, the US economy has had three economic bubbles. The dot com bubble, the commodities bubble, and then the primary home bubble. The primary home bubble is the economic bubble that did so much damage to our economy, and the world's economy when it popped, because it affected household wealth, income, and debt.
When the primary home bubble popped in the US in 2008, we heard the boom that was heard around the world. Millions of people, around the world, lost trillions of dollars in equity in their homes. Those families that were able to keep their homes were left with trillions of dollars of underwater debt when the selling prices of their homes decreased by as much as 60%, depressing our economy's economic activity, and economic activity in many economies around the world. Million of families lost their homes to foreclosure.
Unemployment increased to 25 to 30 percent, or higher in some countries. An enormous amount of misery was created for many people, while other people carted away what little wealth the middle class, and the working poor had accumulated. The lose of wealth by the middle class, and the working poor has occurred each time our economy has went through a boom/bust cycle. The wealth and capital assets of our economy have moved up to the people at the top of the economic ladder. This chart will shock you!!
The Great Recession is global, because other countries invested in our excessive debt, and their economies also had excessive amounts of debt. Other developed economies also have the same income tax policies as the United States.
By the Federal Government relying primarily on the Federal Reserve (Fed), a part of the private banking sector, to stimulate the economy with low interest rates, and to control the creation of economic bubbles, and inflation expectations with higher interest rates, the Federal Government has helped create a huge inequality of wealth in our economy. We should be using the income tax to stimulate the economy, and control the creation of economic bubbles before the Fed uses monetary policies to raise, or lower interest rates.
To help prevent bubbles, help reduce income, and wealth inequality, have a more stable economy, create a more productive economy, maintain stable long term interest rates, maintain employment, reduce interest rate decrease and increase risk, and control inflation and inflation psychology, we need to enact the 2% Appreciation/Inflation Taxation Policy.
There has been much talk about making our tax code simpler. That would be nice, but economies are not simple. Economies are continually moving between the recession cycle, and the inflation cycle. Sometimes economies stagnate into an economic cycle of a deep recession. The United States economy has gone through many such boom/bust cycles. To name a few; The Great Recession that started in 2007, and which we are still experiencing the effects of, 8 years later. The 1930 to 1942 Great Depression. The high appreciation/inflation cycle of 1970 to 1979 is known as the high inflation, and stagflation decade. The 1980 to 1984 Deep Recession was created by the Fed with very high interest rates. We are now in a cycle of very low interest rates created by the Fed. The Primary Home Bubble 2000 to 2008 was created by government housing policy, tax policy changes, the deregulation of the our economy's financial sector, a change in global money flows, fraud and greed. The Stock Market Bubble of 1922 to 1930 has many similarities to the primary home bubble of the 2000 to 2007. (I will explain latter. These are just a few of the economic boom/bust cycles that have occurred in the US economy in the last 100 years.
We must change tax policies to create a more stable economy, to help reduce the boom/bust cycles, if we want to have a better future for ourselves, and our children.
Under certain economic conditions the tax code super charges people to make purchases, and invest with credit. As the economy heats up people's attitude about money (debt) changes. If asset prices are increasing more than 2%, people will reduce their money investments. and move into the hard capital assets (land and housing), and other asset markets to obtain long term capital gains, which are taxed at a lower tax rate than interest income, or purchase products, or assets before prices increase further. But as more buyers enter the market the pressure on prices to increase, increases.
As prices rise more poverty is created, if wages do not increase. To slow down the excessive credit use (money creation) the Fed uses monetary policies to increase interest rates, which can create a recession, unemployment, foreclosures, bankruptcies, and more poverty.
A more efficient solution to controlling inflation expectations.
The tax code can guide people to invest, and spend money to speed up economic recovery. But, tax policies that are enacted to stimulate the economy, during the recession cycle, can become destructive during the high appreciation/inflation cycle by over stimulating the economy, with the use of excessive debt (money) creation in the private sector, if left enforce for too long.
It is important for the tax code to counter-act what economic cycle the economy is moving through. The tax code should change before the economy creates economic bubbles, and before the Fed must raise, or lower interest rates excessively. The tax code should change automatically as the economy changes between economic cycles.
Our economy is dynamic. Our tax system is static. The economy cannot wait for Congress, a 535 politically divided committee, to change the tax code, which can take years. The 2% Policy is an automatic income tax reform policy that will stabilizes long-term interest rates, thus decreasing interest rate increase and decrease risk, and help reduce the excessive use of credit during the high appreciation/inflation cycle.
The tax code should also encourage money (debt) investment, and savings to help increase production; to help increase supply and reduce demand during the high appreciation/inflation cycle. During the recession cycle the income tax should encourage people to spend money, make all kinds investments, and to use credit to expand the money supply.
The 2% Policy will help slow down the economy in the correct way, without adding cost, when the economy is expanding too rapidly. This change in the tax code will also decrease the wealth gap between the impoverished, the middle income people, the working poor, and the people at the top of the economic ladder, without unnecessary tax increases. As explained later.
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